If you are self-employed and want to buy a house, you may need to take extra steps to guarantee you qualify for a self-employed mortgage. Here are a few actions you may take to better prepare for the self-employed mortgage procedure and increase your chances of success.
1. Determine whether you require a self-employed mortgage.
If you own 25% or more of a single business or work as an independent contractor or service provider, you will be designated as a self-employed borrower.
The lender, the type of business you run, and whether you have a co-borrower will all influence how much scrutiny you face as a self-employed borrower. Because a standard job contract does not guarantee your income, a lender will request additional proof of income to ensure you can still afford a monthly payment. A lender may also think you are more likely to miss a payment if your wages fluctuate from week to week. As a result, it may request extra proof that your business is solid and that you have the sufficient cash flow to cover a lower-earning month.
2. Understand the mortgage criteria for self-employed individuals.
The specific criteria you must achieve to be eligible for a self-employed mortgage will differ depending on the lender. In general, you may anticipate being judged on your company’s financial health and sustainability, as well as the amount of experience you have as a business owner.
A lender may examine the following factors while considering your mortgage application:
1. Your financial security. The lender will want to see proof that your monthly payments will be constant and predictable for the duration of your mortgage. It may next request your two most recent tax returns to ensure that your self-employment income has remained consistent over time.
2. How the company runs. A lender will also want to know that your company is financially stable. An underwriter may investigate your location and type of business, the amount of demand for your product, and the likelihood of your business remaining financially robust and lucrative enough to cover your expenses.
3. How long have you been self-employed? A lender would most likely want to see that you have at least two years of experience earning self-employment revenue – although, if you have more experience, the approval procedure may be easier. For example, if you have been in business for at least five years and can demonstrate increasing or consistent earnings, you may be able to get away with less documentation.
4. Personal and business earnings If you rely on business income to qualify for a mortgage, your lender will also want to see proof that your company has a stable cash flow and is not overextended. Depending on how your company is established, you may be required to show your business tax returns in addition to your personal taxes in order to compare your firm’s losses to its profits.
4. Discover how mortgage lenders calculate self-employed income.
A lender will assess your net income – your gross revenue less the costs of running company — to determine if you qualify for a self-employed mortgage.
Lenders want to make sure your business is healthy, so they may look at how much debt it has and whether its income is increasing or decreasing year after year. Even if a sudden decline in business income has little effect on your personal income, a lender may see it as a warning sign for your financial future.
